Tuesday, February 11, 2014

Barry Rosenstein's hedge fund JANA Partners returned 20.4% in 2013 and their Q4 letter details some of their activity before year-end. They note that they've exited their activist stake in Agrium (AGU) and have started stakes in Equinix (EQIX), Juniper Networks (JNPR), and Airbus Group (AIR FP), among other names.

JANA Partners' Thesis on Equinix (EQIX)

JANA writes in its Q4 letter:

"EQIX is the market leader in low latency, network dense co-location data centers. We have been following EQIX as a member of our “JANA Universe” for the last couple of years, and we have waited patiently for an opportunity to buy at an attractive price. We started building our position late in the second quarter and continued to purchase the shares in the third and fourth quarters. We believe there is a wide moat around the specialized services that EQIX provides, even though over-capacity in the lower value added wholesale segment of the data center market has pressured the revenue growth rate and has completely altered investor perception of the quality of EQIX’s franchise. We take comfort in the fact that 95% of revenue is recurring monthly, and churn is less than 10% per year. EQIX has not had a down quarter year over year in the last seven years in terms of revenue or OIBDA. In fact, both revenue and OIBDA have grown in excess of 10% every year. Profitability is robust: OIBDA margins are 45% and FCF margins are 25%. Overall returns on invested capital are still low, a result of the heavy investment in growth; but four wall returns are compelling, we estimate at 25%+ after tax, and we pencil incremental returns on capital to be greater than 15%. CEO Steve Smith and CFO Keith Taylor have been together at the company for six years and have managed through a similar period of a slowdown in growth in the third quarter of 2010. Then, as now, investor confidence was shattered by the slowdown, and to capitalize on the misplaced pessimism, then as now, management announced a share repurchase program. In 2010 the repurchase announcement turned out to be the absolute bottom as the stock went on to triple over the next three years. While we have great hopes for EQIX, we do not expect a similar outcome this time around, but at the current valuation of 12x our estimate of FCF (adjusted for growth capex) for 2014, we believe even a modest acceleration in growth trends will be amplified dramatically in the stock price. We also expect that EQIX will be granted a PLR by the IRS to convert to a REIT, which will yield substantial tax savings."

*Update: An earlier version of this article stated that Coatue Management had been a large shareholder as well. However, they literally just filed an amended 13G with the SEC and have indicated that they no longer own any EQIX shares as of the end of 2013.

Other hedge funds that have held positions in EQIX recently include Lone Pine, Paulson & Co, Senator, and Hoplite, among others.

EQIX shares sold off heavily during 2013, trading around $231 in Q2 and trading as low as $152 in Q4 and obviously JANA has taken advantage of the sell-off to build a position. EQIX has rallied off the lows and now trades at $190, a level it was trading at in Q2 of 2013.

Barry Rosenstein's hedge fund JANA Partners returned 20.4% in 2013 and their Q4 letter details some of their activity before year-end. They note that they've exited their activist stake in Agrium (AGU) and have started stakes in Equinix (EQIX), Juniper Networks (JNPR), and Airbus Group (AIR FP), among other names.

JANA Partners' Thesis on Equinix (EQIX)

JANA writes in its Q4 letter:

"EQIX is the market leader in low latency, network dense co-location data centers. We have been following EQIX as a member of our “JANA Universe” for the last couple of years, and we have waited patiently for an opportunity to buy at an attractive price. We started building our position late in the second quarter and continued to purchase the shares in the third and fourth quarters. We believe there is a wide moat around the specialized services that EQIX provides, even though over-capacity in the lower value added wholesale segment of the data center market has pressured the revenue growth rate and has completely altered investor perception of the quality of EQIX’s franchise. We take comfort in the fact that 95% of revenue is recurring monthly, and churn is less than 10% per year. EQIX has not had a down quarter year over year in the last seven years in terms of revenue or OIBDA. In fact, both revenue and OIBDA have grown in excess of 10% every year. Profitability is robust: OIBDA margins are 45% and FCF margins are 25%. Overall returns on invested capital are still low, a result of the heavy investment in growth; but four wall returns are compelling, we estimate at 25%+ after tax, and we pencil incremental returns on capital to be greater than 15%. CEO Steve Smith and CFO Keith Taylor have been together at the company for six years and have managed through a similar period of a slowdown in growth in the third quarter of 2010. Then, as now, investor confidence was shattered by the slowdown, and to capitalize on the misplaced pessimism, then as now, management announced a share repurchase program. In 2010 the repurchase announcement turned out to be the absolute bottom as the stock went on to triple over the next three years. While we have great hopes for EQIX, we do not expect a similar outcome this time around, but at the current valuation of 12x our estimate of FCF (adjusted for growth capex) for 2014, we believe even a modest acceleration in growth trends will be amplified dramatically in the stock price. We also expect that EQIX will be granted a PLR by the IRS to convert to a REIT, which will yield substantial tax savings."

*Update: An earlier version of this article stated that Coatue Management had been a large shareholder as well. However, they literally just filed an amended 13G with the SEC and have indicated that they no longer own any EQIX shares as of the end of 2013.

Other hedge funds that have held positions in EQIX recently include Lone Pine, Paulson & Co, Senator, and Hoplite, among others.

EQIX shares sold off heavily during 2013, trading around $231 in Q2 and trading as low as $152 in Q4 and obviously JANA has taken advantage of the sell-off to build a position. EQIX has rallied off the lows and now trades at $190, a level it was trading at in Q2 of 2013.

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